FTSE 100 and S&P 500 post steady returns
The UK’s FTSE 100The main stock market index in the UK, the FTSE 100 tracks the performance of the 100 largest companies on the UK stock market. was up 1.66% in April 2023, and the US’s S&P 500 was up 1.05%.* As with all market fluctuations in the last few months, there’s no one single reason.
What we do know, is that we’re heading towards the latter stages of the business cycle. For those that don’t know, the business cycle is the natural ebb and flow of expansion and contraction within an economy.
Declining growth has been in the headlines for a good few months now. The UK, along with Germany, is one of only two G7 countries that have been predicted to contract in 2023 according to research from the IMF’s world economic outlook (WEO) – though the recession we were predicted to already be in has yet to appear. This isn’t a cause for concern though – since economies expand and contract all the time. Indeed, expansion and contraction is actually a sign of a healthy economy, as unchecked economic growth can have detrimental knock-on effects over the long term. Plus, in the business cycle, contraction is often followed by expansion.
Learn more about the business cycle
We’re outlining what might happen in the next 18 months in the following section, to give you a sense of what might be to come.
What might the next 18 months bring?
Given everything that happened in April 2023 – with inflation remaining stubbornly high, to the strong employment numbers and the decreased volatility in bank stocks – the Bank of England (BoE) are very likely to raise interest rates on 11th May. What happens after this is when things will start to get interesting.
April’s inflation figure will almost certainly be a good deal lower than 10.1%. Inflation is a year-on-year figure – and it started to get really high in April 2022. So we’re working from a much higher base for prices. This effect will start to show in April 2023 – but it’ll continue for the rest of the year. Barring anything exceptional happening then, inflation should trend lower for the rest of 2023.
But, we should note that the inflation rate coming down doesn’t necessarily translate to prices falling – it’s simply a slowdown in the rate of price rises.
A lower inflation figure for April, which will be announced on the third Wednesday in May, would give the BoE a reason to pause interest rate rises. However, an inflation reading of anything around 8% is still high – so another interest rate rise in mid June is on the cards.
Inflation should then keep coming down over the summer, so we’re very likely close to the peaks of both the inflation and interest rate cycle. Once inflation looks to be ‘under control’, central banks will come under pressure to look at cutting interest rates because economic growth will be flat or could even be slightly negative.
The best guess is that both interest rates and inflation will be between 4% and 5% by the end of 2023.
Why does any of this matter? We’re always told to focus on the things that we can control when it comes to our finances – and while this is true, we can’t deny the psychological impact of the last 18 months of price and interest rate rises. It’s been something that not many of us have lived experience of. That’s why it’s important to note that things are likely to get better in the not-too-distant future.
Good news story
If you’ve been reading these updates for a while, you know that we usually like to end with good news. So, while stocksStocks, also known as shares or equities, represent units of ownership in a company. and bondsThe financial world’s version of an ‘I owe you’, bonds can be issued by companies or governments. You’d invest in bonds to receive an annual interest payment, plus the initial value of the bond back when it ‘expires’. really suffered in 2022 as unexpected inflation and interest rate rises are bad for valuations, dividendsThe amount of profit that a company returns to its shareholders. and interest earnings from bonds – the opposite should happen over the coming years.
Inflation coming down and stable or declining interest rates are good news for investments. It won’t be a straight-line recovery and all sorts of other unexpected things could happen, but the environment ahead should at least be more accommodating for investment growth than the last 18 months.
*Google Finance, Monday 3rd April to Tuesday 2nd May